System Economics

For the sake of this discussion, let’s define economics simply as the initial net price to convert an existing heat & air conditioning system to a ground source (aka geothermal) heat pump system versus the annual operating cost savings. To keep it simple, I’ll ignore that:

  • annual maintenance cost will likely be less than a fossil fuel system as the heat pump requires little to no maintenance
  • the average life of a geothermal heat pump is ~25% longer than a modern furnace or boiler
  • your geothermal system is likely to increase the market value of your home… without increasing your property taxes in New York State

The economics will depend predominantly on five factors:

  • The unit cost of the fuel (e.g. natural gas, oil, propane) for your existing system
  • The efficiency of the heat pump
  • The type of loop
  • How much modification of existing distribution system(s) (e.g. duct work; hydronic baseboard, radiators, and/or radiant flooring) will be required
  • How much life is left on your current furnace or boiler

Cost of Fuel

In 2023, the unit costs for the prevalent fossil fuels for home heating in western New York were approximately $1.18/Ccf for natural gas, $3.00/gal for propane, and $5.00/gal for heating oil. Taking into account the energy content of each fuel type, the costs per kilowatt-hour (Kwh) were $0.04, $0.11, and $0.12, respectively – propane and oil were roughly three times as expensive as natural gas. So, if you’re converting from a propane- or oil-fueled heating system, the annual savings will be much greater than if you’re converting from natural gas. To illustrate the point, here are annual operating cost saving predictions based on an industry-standard model for a project we recently completed:

Versussavings/yr
Natural gas$860
Propane$2,980
Oil$3,430

Heat Pump Efficiency

Water-to-air (wta) heat pumps – a relative “drop in” replacement for forced-air furnaces – have been available from manufacturers for several years with either a two-stage or a variable-speed compressor; the latter is more efficient but comes at a higher price. Variable-speed compressors for water-to-water heat pumps – generally an appropriate replacement for boilers – have only become available in the last two to four years; prior to that, single-speed compressors were the only option for most residential situations. Using the example from above, here are the predicted annual operating cost savings for the two heat pump options that we presented to the client:

Savings/Year

Versusvariable-speed wtatwo-stage wta
Natural gas$860$550
Propane$2,980$2,670
Oil$3,430$3,120

The installed price (after rebates and tax credits) for the system featuring the variable-speed heat pump was $19,166, whereas that for system featuring the two-stage heat pump was $16,297 – approximately $2900 less. When we compare the economics of the systems on the basis of how long it takes for the operating cost savings to cover the net installation price, we find that the variable-speed system covers its price in 6.4 years versus 6.1 years for the lower priced system, assuming the replaced system was propane-fueled. If the replaced system was natural gas, the “payback” period would have been 22.3 and 29.6 years, respectively.

A couple of key points from this example:

  1. The relatively short payback period for the former propane consumer makes conversion to geothermal very attractive. (If the client had been consuming oil, conversion would have been even more attractive.) It would have been difficult to justify the conversion based solely on economics had the original system been natural-gas-fired… unless that system needed to be replaced as it was at or approaching its useful life. Then it would have been a question of does the incremental cost to replace with a geothermal system justify the operating cost savings.
  2. When considered on the basis of payback period, the variable-speed system is only modestly more expensive. The variable-speed system has more going for it than just higher efficiency; they tend to operate more quietly and provide a superior level of comfort as compared to two-stage systems. For these reasons, the variable-speed system has been preferred by the vast majority of our clients.

Loop Type

The previous examples were for horizontal – trenched – loops. A pond loop is generally a little less costly to install (and enables the heat pump to operate more efficiently)… so it’s the best option among closed loop choices. (An open loop can be the best option, but it’s rare that the necessary conditions to make it feasible are met.) A vertical loop is generally our choice of last resort, when there’s neither enough open land for a horizontal loop – a rough estimate is at least 8000 square feet (and often more) – nor a sufficiently sized pond nearby, as a vertical loop typically adds $12-16K to the net price versus a system using a horizontal loop for a residential installation. If we were to add $14K to the net price of the earlier examples, here’s what the payback period looks like for the variable-speed system:

Payback period (yrs)

VersusHorizontal loopVertical loop
Natural gas22.333.7
Propane6.49.7
Oil5.68.4

Heat pumps are not capable of achieving the same air or water temperatures delivered to the space being heated as furnaces or boilers, respectively. The heated air leaving the ducted blower integrated into a water-to-air heat pump assembly is typically 90 to 100F, whereas the air exiting a furnace is typically at least 120F (and often higher), so a higher volume of air must be delivered to the space by the heat pump system to achieve the same rate of heating. Similarly, only a few water-to-water heat pumps can reliably deliver up to ~140F water temperature to the spaces; many are limited to ~120F. Boilers are typically operated at 160 to 200F.

Geothermal Heat Pump

Generally, this is not an issue for water-to-air heat pump systems as most modern ductwork systems can handle the higher required air flows for heating as they’ve been sized to handle air conditioning which also requires higher air flows for proper conditioning than a furnace. Occasionally, we encounter older ductwork systems (that were not sized for air conditioning) that will require significant modifications to enable a heat pump system. These modifications often add $5 to 15K to the price.

The situation for water-to-water heat pump systems is much more complex given that these systems are much more adaptable to a variety of hydronic distribution systems. Modifications to the distribution system(s) to accommodate lower water temperatures can range from upgrading baseboard to adding one or more air handlers to modifying radiant floor heating systems. It’s rare that no distribution system modifications will be required when converting from a fossil-fueled boiler to a water-to-water heat pump; that rare situation is when the house has been heated by a properly designed and installed radiant floor system and a ducted system exists for air conditioning (if desired). Otherwise, expect distribution system modifications for hydronic systems to add $5 to 40K to the net price of converting a boiler system to geothermal. In its favor, the base system – heat pump and loop – is generally a lower price than a comparable water-to-air system. While it’s beyond the scope of this discussion, suffice to say that payback periods tend to be 50 to 100% longer than for a water-to-air system under comparable conditions of loop and fossil fuel type. Despite this, water-to-water systems can still be attractive, especially considering that additional functionality – whole house air conditioning – is often part of the project scope.

If you find all of this information a little overwhelming, give us a call. One of our system designers will assess your existing system and help you to understand the options that are available to you with a geothermal heat pump system including their installed prices and operating cost savings estimates… so you can make an objective, informed decision whether converting to geothermal heating and cooling makes economic sense for your situation and needs.

For more information or to schedule a free in-home consultation, contact Steve: 585.802.7924 or steve@LCGeo.com.